T3 is on, selling $8bn of Telstra shares

TELSTRA has pledged not to undermine the public float of $8
billion worth of its shares as the Federal Government moved towards
cutting its ties in the telecommunications goliath.

Prime Minister John Howard's announcement last night that the
Government would sell about one-third of its majority holding came
after days of arm-twisting to force Telstra to promise not to
disrupt the sale by attacking the regulations that govern it.

The Government will offer the shares to the Australian public
and institutional investors in an October-November float.

Both the sale proceeds and the balance of the Government's $22.5
billion, 51.8 per cent holding will go into the Future Fund.
Telstra's share price yesterday closed at $3.50.

"For too long, the Government has had a massive conflict of
interest, as the owner and seller of Australia's largest telco and
as the industry regulator," said Mr Howard. "The Government does
not have to own Telstra in order to regulate it."

He refused to say what would be a reasonable price for T3
shares. That was "something for the market to determine".

This will be the largest share offer in Australia since T2 in
1999  when Telstra shares fetched $7.40.

Finance Minister Nick Minchin said he could understand existing
shareholders would be disappointed by the share price fall. T2 had
been at the height of the global tech boom.

But "we must make a decision about what price is appropriate in
the context of the 2006 market rather than looking back to
1999".

Investors can take their shares in two instalments over 18
months. Those buying by instalment will be entitled to the Telstra
dividend of 28 cents for the next year, and Telstra's share price
will be propped up by a requirement the Future Fund not sell any of
the shares it receives for two years.

The decision to launch the long-awaited T3 came as time had
virtually run out for a float this year. It was delayed by the
company's failure to give an adequate guarantee of "good
behaviour", and almost derailed by Thursday's provocative comments
from Phil Burgess, right-hand man to Telstra's managing director
Sol Trujillo. Dr Burgess said only "someone from another planet"
could expect Telstra to stop attacking regulations.

Telstra has muzzled Dr Burgess during the sale process. Company
chairman Don McGauchie said last night only Telstra's sale team led
by Mr Trujillo could speak on matters affecting the sale. He said
Dr Burgess's comments "do not represent Telstra's position".

Mr Howard spoke directly to Mr McGauchie to hammer out an
agreement to allow T3 to go ahead.

"Telstra's chairman, board and senior management have assured
the Government of their strong commitment to this sale and their
ongoing co-operation," Mr Howard said. The company had made it
clear it would not use the sale process "as a vehicle to campaign
for changes to the regulatory regime".

Mr McGauchie said it was well known Telstra was critical of the
current regulatory regime, but "we accept our legal
obligations".

Telstra would fulfil its disclosure obligations during the sale,
which "may involve explaining the impact of the regulatory regime".
But any comments "will be proportionate, measured and factual".

Mr Howard said despite the low share price, the Government
believed it could achieve "an appropriate return for taxpayers at
this time".

The Government's sales advisers' "unanimous advice" was that
there was sufficient demand to support an offer of this size and
"it can be done at a fair price".

Advisers to the T3 sale indicated the wording of the PM's
statement left open the possibility that if there is strong demand
the Government could sell more.

"Based on the extensive market research that we have been
conducting over the last nine months, retail demand looks to be
very strong," said Matthew Grounds, co-head of investment banking
at UBS, one of the three global co-ordinators of the sale.

The process of nailing down the sale has been torturous for
senior Government players. Senator Minchin held talks with the
Telstra board late last week, and senior sources expressed
confidence over last weekend that despite some uncertainties, the
Government could proceed with the sale this week.

Telstra helped last Monday by guaranteeing it would maintain its
current dividend for 12 months. But it also used the process to
fire a warning shot that it would continue to campaign publicly on
regulation.

A discussion following that announcement, in Canberra between
senior ministers on Tuesday, resolved that the Government was not
at all confident that Telstra management would hold their
rhetorical fire on regulation during a float to mum and dad
investors.

The Government's concerns were amplified by Dr Burgess' outburst
on Thursday. Mr Howard spoke to Mr McGauchie on Thursday evening,
making it clear Telstra had to guarantee it would cease the
guerilla war or the process would be stopped.

Intense discussions between Mr McGauchie and senior members of
Mr Howard's staff continued throughout yesterday.

Mr Howard started yesterday morning in Sydney, sounding
pessimistic in a radio interview about anything happening
imminently, and flew to Tasmania. He remained on the phone to
several of his colleagues throughout the day and was updated on the
progress of discussions between Mr McGauchie and his staff.

Telstra agreed to put out a statement distancing itself from Mr
Burgess' comments.

The final decision to proceed with a retail offer was taken by
Mr Howard yesterday afternoon around 3pm. It was announced in
Tasmania shortly afterwards.

Opposition Leader Kim Beazley said Mr Howard had sold out
Australia's future and betrayed T2 shareholders.